Investment market update: October 2022

Much of 2022 has been marked by investment volatility and economic uncertainty, and October was no different.

According to the International Monetary Fund (IMF), there is a rising risk of a global recession.

The organisation downgraded its global growth forecast for 2023 to 2.7%. It said financial instability was linked to shocks caused by the Covid-19 pandemic, the war in Ukraine, and climate disasters.

While uncertainty can be worrying as an investor, remember to focus on your long-term goals. If you have any questions about what the current circumstances mean for you, please get in touch.

UK

In the UK, political turmoil continued to influence the markets.

After September’s mini-Budget led to volatility, the now former chancellor Kwasi Kwarteng reversed some of the announcements, including the abolishment of the additional-rate of Income Tax.

It did little to calm the markets, and the Bank of England (BoE) was forced to step in after some pension funds were placed at risk. The BoE pledged to purchase £65 billion of government bonds that had fallen in value.

The IMF praised the BoE, saying it acted “very appropriately and quickly”.

The backlash from the mini-Budget led to now former prime minister Liz Truss sacking Kwarteng, with Jeremy Hunt taking his role. The new chancellor cancelled nearly all the mini-Budget announcements, including cuts to Corporation Tax.

Truss followed shortly after, saying she was resigning because she could not deliver the mandate on which the Conservative Party elected her – making her the shortest-serving prime minister in British history.

Rishi Sunak was appointed as the new prime minister within days after all other candidates dropped out of the race. In his first speech at Downing Street, Sunak said there were “difficult decisions to come” and the UK was facing a “profound” economic challenge.

Amid this turmoil, it’s not surprising that growth forecasts are being downgraded.

Deutsche Bank now expects GDP to fall by 0.5% in 2023 before growing by 1% in 2024 when the economy would finally return to its pre-pandemic level.

Data from the Office for National Statistics (ONS) highlights the pressure businesses are facing. Company insolvencies in England and Wales hit the highest levels since 2009 due to high energy prices, supply chain disruptions, and rising material costs. Construction firms were among the hardest hit and made up 20% of all insolvencies.

Worryingly, further ONS data suggests many businesses aren’t in a strong financial position to overcome a downturn. 40% of UK firms have either no cash reserves left or have less than three months’ worth.

Consumers are also facing challenges.

ONS figures show that once inflation is considered, average pay is falling. Excluding bonuses, pay fell by 2.9% in real terms between June and August 2022.

This is having a knock-on effect on the housing market. HMRC figures show that residential property transactions fell by 32% in September when compared to a year earlier.

EY ITEM Club warned that falling house prices are a sign of things to come. The forecasting group expects property prices to fall by 5% over the next year.

Energy supply also continues to be a significant challenge facing the UK. The war in Ukraine has led to soaring prices and disruptions in supply. The National Grid issued a warning that UK households and businesses could face planned power cuts throughout winter if it was unable to import electricity from Europe.

Europe

There was some good news from the eurozone – industrial output increased by more than expected.

Across the whole area, output increased by 1.5% in August. France and Italy led the way with increases of 2.5% and 2.3% respectively. However, Germany, which is often the economic powerhouse of the bloc, saw its output decline by 0.5%.

The eurozone also recorded a high trade deficit due to soaring energy prices. According to Eurostat, despite exports increasing by 24%, the deficit is €51 billion due to imports surging by almost 54%.

While many countries are facing inflation, Belarus announced a bold way to control it – President Alexander Lukashenko imposed an immediate ban on consumer price rises. The country has been hit by sanctions due to its support of Russia and consumer prices have increased by around 18%.

US

Like many other countries, the US is at risk of falling into a recession. Capital Economics says it’s now “more likely than not” that the economy will contract.

Inflation continued to be an issue for both businesses and consumers. The rate reached a 40-year high of 8.2% in September.

The White House also commented on the energy challenges that many other economies are facing. After the Opec+ oil cartel and its allies agreed to cut oil production by 2 million barrels a day to push up crude oil prices, the White House said it highlighted the US’s need to become less dependent on foreign producers of oil.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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